What is the medicare deduction on my paycheck

The Medicare tax is a percentage of gross wages that all employees, employers and self-employed workers must pay to fund Medicare. In accordance with the Federal Insurance Contributions Act (FICA), employers are required to withhold the correct amount of Medicare tax and Social Security tax from every paycheck and forward it to the government on time. Failure to do so can result in significant penalties.

What is additional Medicare tax?

With the passage of the Affordable Care Act (ACA), the United States government mandated an additional Medicare tax for high-income earners. Additional Medicare Tax is a surtax applied to wages, railroad retirement (RRTA) compensation, and self-employment income.

Once an employee earns more than the threshold, employers are responsible for withholding additional Medicare tax on those wages. Employers do not have a responsibility to contribute to the additional Medicare tax rate though there are other taxes employers do pay.

For more information, please visit the IRS website for Additional Medicare Tax FAQs.

How do self-employed individuals pay Medicare tax?

In addition to income tax, people who work for themselves must pay self-employment tax, or SE tax. It combines the Social Security and Medicare taxes withheld from the pay of most wage earners.

What are taxable wages?

Taxable wages are salaries paid to an employee that by law, must have taxes withheld. Alternatively, there are non-taxable wages that are not subject to tax withholding.

What wages are subject to Medicare tax?

All covered wages are subject to Medicare tax and there is no wage base limit. For more information, see Publication 15, (Circular E), Employer’s Tax Guide from the IRS.

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What Are Medicare Wages?

Medicare wages are employee earnings that are subject to a U.S. payroll tax known as the Medicare tax. Similar to the other U.S. payroll tax, Social Security, the Medicare tax is used to fund the government's Medicare program, which provides subsidized healthcare and hospital insurance benefits to people ages 65 and older and people with disabilities.

Medicare and Social Security taxes are levied on both employees and employers under the Federal Insurance Contributions Act (FICA).

Key Takeaways

• Medicare is funded by a payroll tax of 1.45% on the first $200,000 of an employee's wages. Employees whose wages exceed $200,000 are also subject to a 0.9% Additional Medicare Tax.
• Employers also pay 1.45%.
• The Medicare tax for self-employed individuals is 2.9% to cover both the employee's and employer's portions.
• The 2020 CARES Act expanded Medicare's ability to cover the treatment and services of those affected by COVID-19.
• Employees should also consider having money deducted from their wages to fund their retirement through an employer-sponsored plan or IRA.

Understanding Medicare Wages

There is no limit on Medicare wages. The employee's share of the Medicare tax is a percentage withheld from their paycheck. In 2020 and 2021, the Medicare tax is 1.45% on an individual's wages. Employers also pay 1.45%.

There is also a 0.9% Additional Medicare Tax that only the employee filing an individual tax return pays for wages that exceed $200,000. The additional tax also applies to those whose wages exceed $250,000 if they file a joint return and exceed $125,000 for married taxpayers filing a separate return.

For 2021, the rate for the Social Security tax is 6.2% for the employee and 6.2% for the employer, or 12.4% total—the same as 2020. The tax applies to the first $142,800 of income in 2021, and up to $147,000 in 2022. The Social Security tax rate is assessed on all types of income that an employee earns, including salaries, wages, and bonuses.

Unlike the Social Security tax, there is no income limit on applications of the Medicare tax.

Medicare Tax for the Self-Employed

Under the Self-Employed Contributions Act (SECA), the self-employed are also required to pay Social Security and Medicare taxes. In 2021 and 2022, the Medicare tax on a self-employed individual’s income is 2.9%, while the Social Security tax rate is 12.4%. The maximum Social Security tax for self-employed people in 2021 is $17,707.20, and $18,228 in 2022.

Self-employed individuals must pay double the Medicare and Social Security taxes that traditional employees pay because employers typically pay half of these taxes. But they are allowed to deduct half of their Medicare and Social Security taxes from their income taxes.

The CARES Act of 2020

On March 27, 2020, former President Trump signed a $2 trillion coronavirus emergency stimulus package, called the CARES (Coronavirus Aid, Relief, and Economic Security) Act, into law. It expands Medicare's ability to cover treatment and services for those affected by COVID-19. The CARES Act also:

• Increases flexibility for Medicare to cover telehealth services.
• Authorizes Medicare certification for home health services by physician assistants, nurse practitioners, and certified nurse specialists.
• Increases Medicare payments for COVID-19–related hospital stays and durable medical equipment.

For Medicaid, the CARES Act clarifies that non-expansion states can use the Medicaid program to cover COVID-19-related services for uninsured adults who would have qualified for Medicaid if the state had chosen to expand. Other populations with limited Medicaid coverage are also eligible for coverage under this state option.

The CARES Act changes to Medicare will likely continue until the pandemic ends.

Special Considerations

In addition to noting particular withdrawals for Medicare and Social Security from each paycheck, an employee should consider options for saving for retirement. In many cases, you can elect to have a portion deducted from your paycheck for this purpose. Many employers offer certain types of retirement plans, depending on the length of time an employee has been with an organization (known as vesting) and the type of organization (company, nonprofit, or government agency).

Many companies, for example, offer a 401(k) plan. A 401(k) is a qualified employer-sponsored retirement plan into which eligible employees can make salary deferral contributions. Earnings in a 401(k) accrue on a tax-deferred basis. A 403(b) retirement plan is comparable to a 401(k) plan but is designed specifically for employees of public schools, tax-exempt organizations, and certain ministers. A 457 plan is a retirement plan offered to state and local government employees.

The most common investments offered in 401(k) plans are mutual funds. A 403(b) lets employees invest in a tax-sheltered annuity plan or a designated Roth account.

You can also opt to save for retirement via an IRA in the event your employer does not offer a retirement plan, or you can use one to save an additional amount for retirement above and beyond the money saved in an employer-sponsored plan. As with a 401(k), retirement savers can enjoy the benefit of tax-deferred savings in a traditional IRA.

How much of my paycheck goes to Medicare tax?

The payroll tax for Medicare is 1.45% on the first $200,000 of an employee's wages. If you make more than $200,000, you will also pay a 0.9% Additional Medicare Tax. You aren't the only one paying Medicare tax. Employers also pay 1.45%.If you are self employed, your Medicare tax rate will be 2.9%, in order to cover both the employee's and employer's portions.

Why do I have to pay Medicare tax?

Paying Medicare tax now makes it possible for you to have cheaper coverage later. For instance, Americans who paid proper taxes throughout their career will often qualify for free premiums on Medicare Part A.